Trade Creation Effect of Regional Trade Agreements in the Presence of Duty Drawbacks

Discussion Papers

No.804

by Kazunobu Hayakawa, Nuttawut Laksanapanyakul, and Hiroshi Mukunoki

December 2020

ABSTRACT

This study re-examines the trade creation effect of regional trade agreements (RTAs) under the duty drawback (DD) regime. We theoretically demonstrate that firms’ switch from the DD to RTA regime increases or decreases their imports and empirically analyze the regime-switching effect on imports using firm-level trade data in Thailand, for 2011–2017. We find that firms’ switch to the RTA regime increases their imported inputs for domestic production rather than for expanding exports. In terms of total exports, medium-sized firms switch to the RTA regime. The large-sized firms continue importing under the DD regime even after RTAs’ entry.

Keywords: Duty drawbacks, Trade creation effect, Regional trade agreement

JEL classification:F15, F53

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